Oklahoma's retail electricity market is being restructured. The main motivation being offered is to lower electricity prices for Oklahoma consumers and businesses via the introduction of retail competition into the market for power generation (that is, the market defined by end-use customers and electricity producers or marketers). Although prices are an important element of reform, other aspects of citizens' quality of life-like protection of public health and the environment-deserve equal treatment as the new rules of the marketplace are put in place. To date, such concerns remain unaddressed.

Background
Nationwide, the electricity production industry is the single largest industrial polluter. It is responsible for a majority of the pollution leading to acid rain (sulfur dioxide), and significant portions of that leading to smog (nitrogen oxides), asthma (tiny airborne particles), and global climate change (carbon dioxide). This pollution occurs because most electricity is produced by burning fossil fuels-coal, oil, and natural gas. About 2/3 of the electricity produced in Oklahoma comes from coal, with most of the rest coming from natural gas. About 9% of that electricity is exported to other states.

Alternatives to polluting forms of electricity production are available. One is renewable electricity sources, so-named because they're constantly replenished, and thus will never run out. Many of these sources operate virtually pollution-free; examples include solar, wind, and geothermal facilities.

Oklahoma is well-endowed with solar and wind resources. According to the US Department of Energy, the entire state is suitable for flat-plate solar electricity panels, with the far west and Panhandle being excellent regions. Moreover, about 40% of the state has good winds on land available for development, enough potential wind power to provide 17 times the state's entire current annual electricity consumption. Solar and wind power remain underutilized, however, because they've been financially unattractive compared to fossil fuels.

Another alternative is improving our energy efficiency: using less electricity to do the same jobs it does now. Businesses and consumers don't want electricity per se, but the services it provides, such as heating and cooling, lighting, and running appliances and equipment. Right now Oklahomans, like their counterparts in other states, use electricity very wastefully. Cost-effective, off-the-shelf technologies could save customers large amounts of electricity and money, but they too are underutilized because several marketplace barriers interfere with their widespread adoption.

Why Energy Markets Fail to Provide Efficiency and Renewables
One widely held view asserts that totally free energy markets are best because then suppliers and customers, acting in their own self-interest, will choose appropriate amounts of efficiency investments or renewable supplies depending on their cost-effectiveness. In this view, the appropriate amount of efficiency and renewables is defined by "whatever the market will bear," meaning whatever outcome results under existing market conditions.

We reject that view, because experience clearly shows that free energy markets fail to operate effectively because several marketplace obstacles and complexities get in the way. Many historical examples from industry, commercial buildings, and residences show that improving energy efficiency can be a very lucrative investment, with payback times as short as 1 year and annual returns on investment of 50-100% or even higher. Yet many businesses and homes have failed to take advantage of such opportunities to save energy and money. Why?

Markets depend on prices to work well: when a product's price rises, consumers generally seek an alternative to the product. Although this rule holds for energy prices, just as important as the prices themselves is the ability to respond to them. Lack of response to prices is where energy market failures occur. Ranging from a simple lack of information (how much electricity does my refrigerator use?) to the difficulty of computing life-cycle costs (total of initial cost plus lifetime operating and maintenance costs) to perverse or split incentives (homebuilders ignoring annual energy costs in their products; landlords not caring about tenants' high energy bills) to hidden subsidies to fossil fuels (at least $21-36 billion per year in 1989), energy market failures consistently stack the deck against efficiency improvements.

For renewables the main problems are the entrenchment of the gigantic existing fossil fuel industries, which get some unwarranted financial breaks from government, and the many public benefits of using renewables that market prices fail to take into account. Among those "external benefits" are lower pollution of air, water, and land (which lead to a cleaner environment and better public health) and a more diverse mixture of electricity supply options (making customers less vulnerable to large fuel price swings and supply disruptions, whether caused by market conditions or political developments). Moreover, experts estimate that if solar and wind power could simply achieve a foothold in the market, costs of production (and thus, retail prices) would rapidly fall because of economies of scale. Notably, one survey shows that 75% of the general US population is willing to pay a price premium for electricity produced from non-polluting sources.

Remedies to Market Failure
Dedicated energy efficiency programs are one proven way to compensate for energy market failures. In such programs, savings are achieved through customer education, energy audits of buildings, and rebates for the purchase of new energy-efficient equipment that either permanently replaces old, inefficient equipment or, if in a new installation, has a rated efficiency higher than any minimum standards required by law. Examples of new equipment include refrigerators, freezers, air conditioners, heat pumps, lights, water heaters, dishwashers, and shower heads.

During the 1980s many regulated electric utilities developed large-scale energy efficiency programs. Regulators were generally friendly to such efforts because they provided environmental protection and saved customers' money. The programs were also in the utilities' financial interest, however, since saving electricity was cheaper than building new power plants, and utilities generally weren't allowed to purchase power from each other. Efficiency programs can also increase the reliability of the power system, as the programs often also reduce peak system load, thus reducing the likelihood of brownouts.

As wholesale electricity markets (power producers trading electricity with each other) were restructured in the mid-1990s, many utility efficiency programs were cut or eliminated. If left to market forces alone, the current wave of retail restructuring is expected to lead to further cuts as "price wars" erupt among competing suppliers. Since measured electricity savings are directly correlated with the level of funding of efficiency programs, the result is sure to be reduced electricity savings as market barriers reassert themselves.

In Oklahoma, efficiency programs have historically been funded at levels far below national and regional averages. In 1998, virtually nothing was spent on such programs, meaning consumers and businesses are missing out on a host of highly profitable and environmentally friendly efficiency investments. Retail restructuring offers a golden opportunity to reverse that trend.

Proposed Policies
Effective protection of public health and the environment requires that pollution from electricity generation be reduced. Achieving such reductions in a restructured electricity market requires, in turn, that several policies be established, enforced, and fully funded on a long-term basis (to the year 2012 at least, perhaps with periodic review) as a matter of state law. Most have already been implemented in many other states; moreover, several will also save money on customers' electricity bills. The Sierra Club, Oklahoma Chapter proposes three main ways to reduce pollution from electricity generation in Oklahoma:

1. Stimulate increased energy efficiency in homes and businesses using two specific, complimentary techniques
   • Set up a long-term efficiency public benefits fund
     This fund would be devoted to reducing energy waste in Oklahoma by getting well-proven efficiency measures into the hands of businesses and consumers via customer education, energy audits of buildings, and rebates for the purchase of new energy-efficient equipment (see above list under "Remedies to Market Failure"). Rebates would be offered if the new equipment either permanently replaces old, inefficient equipment or, if in a new installation, has a rated efficiency higher than any minimum standards required by law. The fund would be controlled by an independent public agency, not electric utilities or other entities with a financial interest in providing electricity. Target funding levels would be 3% of the annual revenues from statewide electricity sales, with funding generated via a "system benefits charge," a tax on electricity consumption. That tax would be levied on all Oklahoma electricity customers; it amounts to 2 mills per kilowatt-hour consumed for residential customers (assuming a statewide average retail residential electricity price of 6.6˘/kWh).

     System benefits charges are common: they appear on long-distance phone bills (for universal service) and airline travel tickets (for airport maintenance and air traffic control). Although initially the proposed electricity tax would cause electricity bills to rise by about 3%, over time the bills would fall for any customers who take advantage of the new efficiency programs because their electricity use would decrease.

   • Give electricity suppliers a direct financial incentive to improve customers' efficiency
     This could be done in many ways. One option would be allowing any electricity provider to be reimbursed a portion (say, 15%) of the savings it provides on any customer's bill through efficiency or conservation programs. Such reimbursement could occur from the public benefits fund, and the amount of eligible savings could be defined as the so-called "deemed" savings, a method commonly used in other states' programs

2. Stimulate the production of renewable, virtually pollution-free electricity using two specific, complimentary techniques
   • Enact a renewables portfolio standard
     Require that of all annual electricity sold by each providing firm in Oklahoma, at least 3% be produced using new, virtually pollution-free renewable sources by 2006, and 7% by 2012. Any electricity-providing firm not wishing to produce such power itself could purchase credits for such power from other firms. This provision will provide a stable market for renewables, thus increasing their use.

   • Set up a long-term renewables public benefits fund
     This fund would be devoted to getting a market for clean power production off the ground in Oklahoma, including solar, wind, and perhaps others. Such a fund will allow the promotion of technologies most appropriate in the long term even if they're cost-ineffective in the short run. The fund would be controlled by an independent public agency, not electric utilities or other entities with a financial interest in providing electricity. Target funding levels would be 1% of the annual revenues from statewide electricity sales, with funding generated via a "system benefits charge," a tax on electricity consumption. That tax would be levied on all Oklahoma electricity customers; it amounts to 0.66 mills per kilowatt-hour consumed for residential customers (assuming a statewide average retail residential electricity price of 6.6˘/kWh).

3. Allow willing customers to choose cleaner, greener power with confidence by requiring full, audited disclosure to customers of price, fuels used, and pollution emitted

   Consumers need an information label explaining the price and pollution impacts of power production that's similar to existing nutrition labels on food packages. Under this rule, all electricity marketers selling power in Oklahoma would disclose to customers the average retail residential or commercial price at various typical consumption levels, the fuel mix used (the relative proportions of coal, gas, oil, nuclear, hydro, solar or wind, and waste incineration), and the pollution emitted (nitrogen oxides, sulfur oxides, carbon dioxide, particulates, high-level and low-level radioactive waste) in generating the power being sold or offered. This information would be presented in a clear, standardized way on all electricity bills and marketing materials, and its accuracy would be verified by an independent third party.

   
   
   
   

   REFERENCES

   American Council for an Energy Efficient Economy, "State Scorecard on Utility Energy Efficiency Programs," April 2000

   Environmental Working Group and World Wildlife Fund, "Unplugged: How Power Companies Have Abandoned Energy Efficiency Programs," October 1998

   Lovins, A.B. and L.H., "Climate: Making Sense and Making Money," Rocky Mountain Institute, November 1997

   Lovins, A.B., "Negawatts: Twelve Transitions, Eight Improvements, and One Distraction," Energy Policy, April 1996

   Union of Concerned Scientists, "Powerful Solutions: 7 Ways To Switch America To Renewable Electricity," January 1999

   US Department of Energy, Energy Information Administration, State Electricity Profiles

   US Department of Energy, National Renewable Energy Laboratory, "Choices for a Brighter Future: Perspectives on Renewable Energy," September 1999

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